Think big

(Page 2 of 4)

"We didn't search out an e-retailer of T-shirts," Davis says. "That happened to be the core focus. We saw CustomInk as being a broader platform company to digitally serve groups, first by selling them T-shirts, and then other things."

Similarly, with Lolly Wolly Doodle, which lets shoppers customize clothing for little girls and sells most of those personalized items under $50. "We believe Lolly has created a way to market, manufacture and distribute apparel on an affordable mass basis," he says. The retailer could offer similar products for teenage boys and other age groups, Davis says. That looks like a big opportunity.

Tip 2 – Think differently

Ben Lerer, who is both a venture capitalist as a partner at Lerer Ventures and an online retailer as CEO of Thrillist Media Group, which owns young men's apparel site JackThreads.com, says he gets excited by startup founders with new ideas.

"I'm looking for entrepreneurs who aren't just trying to do the same thing as others in the space and hoping to out-operate them by 5%, but people who approach a problem from a really different angle," Lerer says.

The combination of Thrillist Media and JackThreads, he says, represents that kind of new thinking, and came about serendipitously. Lerer and a friend started Thrillist when they were just out of college as a web site for young men like themselves that recommended bars, restaurants and shops. Their plan was to make money on advertising. It turned out that one of their best advertisers was a startup e-retailer called JackThreads that targeted young men. "The guys they would acquire from us turned out be high lifetime-value consumers for them," Lerer says.

That lightbulb moment came when Lerer realized that it's much easier to go from reading about a shirt on a web site to buying it than it would be to go from seeing a shirt ad in a magazine to making the purchase. "In TV, print, radio, it's a big leap to take from consuming content to purchasing," he says. "In digital, people consume content and purchase in the same medium." That led to the idea of combining Thrillist's content sites with e-commerce, and Thrillist bought JackThreads to get started. Thrillist, which had raised $2 million when it launched in 2005, raised $13 million in a Series A funding round in 2012 to build its JackThreads business, which booked $75 million in web sales in 2013, according to the Internet Retailer 2014 Top 500 Guide.

Doing something differently is a key to attracting venture capital, other e-retailers agree. ScoutMob Shoppe, which raised $3 million in April, offers handmade goods from independent craftsmen, "mainly husband-and-wife teams that make these goods on weekends," says Paul Heerin, chief financial officer of ScoutMob and general manager of its Shoppe online selling platform. Those types of products aren't on Amazon, which is a point he emphasized when talking to potential investors. "That was a huge plus for us," he says.

ScoutMob's Shoppe also has another novel hook: Consumers in 13 major cities can search for items made by local craftspeople. "People want to be closer to their goods," Heerin says, pointing to the rise of craft breweries and "made in USA" e-commerce sites. "That's a macro trend, and the kind of thing venture capitalists look for."

Tip 3 – Show what you can do

Before Ryan Babenzien and Jon Buscemi sought venture capital they decided to prove that they could produce and sell $59 sneakers that their target audience, consumers ages 18 to 24, would love. They produced 2,400 pairs, launched their Greats.com e-commerce site in August 2013, and sold out in two months, says Babenzien, the startup's CEO.

"We haven't spent one penny on marketing," Babenzien said in April. That was after his company raised $1.5 million in seed funding based on the success of its first products. How did they sell the shoes without advertising? It helped that Buscemi, the creative director, is well known to sneaker enthusiasts from his work at DC Shoes and Gourmet Brands. He had more than 58,000 followers on Instagram as of last month.

That's significant, says Mike Hirshland, founder of Resolute Ventures, which invested in Greats.com. "One good telltale sign is success at building a rabid social media following," Hirshland says. "That speaks to a voice and a following. And in many ways that's the core test of the brand."

Venture capitalists say one of the main things they consider when evaluating an e-retail investment is proof that the business has a product consumers want. NatureBox, for example, was able to show investors that it had grown from shipping 50,000 boxes of its snacks in 2012 to more than 1 million in 2013, and that it was attracting valuable and loyal customers, Lee says. "NatureBox came to us not only showing revenue rapidly growing month over month, but the unit economics—what people were willing to pay, the low churn rates and reasonable costs of customer acquisition—gave us a high level of confidence that you could build a very profitable business from that segment," he says.

Nor did Lerer take additional venture funding until he had spent 18 months operating JackThreads.com in conjunction with Thrillist.com. "We saw it was working, that we were getting good at turning readers into buyers and buyers into readers," he says. "We proved there was an interesting business model in the combination of content and commerce." By the time Thrillist raised $13 million in 2012, Lerer says it was generating about $30 million in annual revenue, more than half of it from JackThreads.com.

Discount e-retailer NoMoreRack.com reached an annual run rate of $70 million by the time it raised its first venture funding in 2012. "We had answered the question, 'Can you guys scale this business in an Amazon-dominant world?'" says founder and CEO Deepak Agarwal. He says that allowed the e-retailer to raise money without giving up as much equity as it would have if it were not already bringing in significant revenue. Even after raising another $40 million in 2013, Agarwal says the founders still own more than 60% of the company.